President Xi Calls For "Redistribution Of Wealth" To Help "Expand The Middle Class"

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by Tyler Durden
Wednesday, Aug 18, 2021 - 11:50 PM

Since ascending to the position of most powerful man in China back in 2012, President Xi Jinping has demanded that Communist Party members and non-members alike study the Communist Manifesto and other Marxist texts. Now, he's reintroducing some good ol' fashioned communism into his ruling policies. On Tuesday, Chinese media reported that President Xi had put the country's wealthiest citizens "on notice" that he was planning some redistributive policies to aid in the "common prosperity". These policies will include income "regulation and redistribution", according to Xinhua.

During a Tuesday meeting of the Communist Party's Central Committee for Financial and Economic Affairs, President Xi and others detailed new strategies to target the upper echelons of Chinese society. Officials vowed to "strengthen the regulation and adjustment of high income, protect legal income, reasonably adjust excessive income, and encourage high-income groups and enterprises to give back to society more," according to a summary of the meeting published by Xinhua, one of the biggest newswire services based in.

According to Reuters, a readout from the meeting suggests President Xi wants to "restrain 'unreasonable income', hike wages and expand the middle class."

At the same time, officials also pledged to expand the size of China's middle-income group, grow the earnings for low-income group and prohibit illicit income to promote social fairness and justice. Finally, they also reaffirmed Deng Xiaoping's famous words: to "let some people get rich first," because allowing this to happen will help foster conditions for others to grow wealthy as well.

Like in the US, the pandemic saw wealth inequality expand in China. And right now, the wealthiest 1% of Chinese people now hold 31% of the country’s wealth, up from 21% two decades ago, according to a report from Credit Suisse.

As Beijing struggles to stamp out the country's most broad-based COVID outbreak since the original outbreak in Wuhan, China's leadership pledged to create conditions for people to "enhance their education and move up the income ladder." They also called for promoting the equal access to public services by improving housing supply, care for the elderly and enhancing the medical system. The leadership also highlighted the need to curb financial risks.

Interestingly, the government singled out the eastern province of Zhejiang, home to Alibaba and known for its robust private sector, as a pilot zone for the new initiatives. The decision comes after the province released new targets for disposable income growth that would see the per capita rate raised by 45% within 5 years. It's just the latest sign that Alibaba's troubles may not be over.

As one Indian TV station noted in its coverage of Xi's remarks, income inequality in China remains wide - the richest 20% earn more than 10 times poorest 20% -- and hasn't budged since 2015.

The TV station also noted that Beijing has already started terrorizing many of the country's wealthiest men, including Alibaba founder Jack Ma, during its crackdown on China's largest tech companies. China's crackdown on tech companies has hammered shares of US-traded Chinese firms, and recently led the head of the SEC to issue a warning to American shareholders to approach investing in Chinese stocks with caution because of the shady structure underpinning the shares. Investors in Chinese firms own shares in a shell company based in the Caymans, not the firm itself.

After China's unique brand of state-directed Communism helped drive robust growth using, among other tools, an explosion of debt, President Xi has decided that it's time that the wealthy chip in more to the general trust. After all, with new resources to exploit in Afghanistan and a potential invasion of Taiwan on the horizon, the CCP is probably going to need the money.

Reuters also pointed out that recently, President Xi has mostly succeeded at making Chinese investors less rich, by wiping more than $1 trillion off the value of US-listed Chinese stocks since February (and China's domestic markets have also experienced some turbulence as of late).

And his latest words caused even more market turbulence, as European-traded luxury brands including LVHM, Burberry, Kering, Hermes, Richemont and others took a hit.

"This is a rather nervous market reaction to leadership statements in China about the 'third wealth redistribution,'" Bernstein analyst Luca Solca says in an email. "I am not sure there is necessarily a lot to fear from that," he adds. "Time will tell."

Whether he can actually succeed in driving up disposable incomes will be much trickier.